Insight 27 October 2020

ESG and Sustainability in the Real Assets sector

Environmental, Social, Corporate Governance (ESG) and Sustainability have raced from peripheral buzz words, arguably straight through an industry trend and are now talked about as a critical necessity. Sir David Attenborough has just submitted his “witness statement” and the message could not be clearer; urgent action is required on climate change to save nature in order to save ourselves.

It seems almost absurd to turn from such an apocalyptic warning to talk about ESG in the real assets industry, but upon closer inspection, this is not so ridiculous. Currently change is been driven fastest by the private sector than International Governments and secondly because the nature of the real estate asset class is that it can have a huge bearing on our environment and sustainability issues. ESG and sustainability for real assets spans how we construct, use and recycle buildings and infrastructure including where that infrastructure crosses over into renewable energy projects.”

Simon Vardon Global Head of Real Assets

The nature of real assets projects is that they are typically long-term and as immovable assets, they are directly linked to a location. These two factors example why it is important to incorporate ESG considerations into projects within the industry. ESG issues are more likely to be material over the life of the project / asset and the asset itself will have a direct impact on its geographic location.

Taking each in turn – what do they mean in the real assets sector?

Environmental factors are often the most obvious of the ESG factors for a tangible asset, however, they can cover a very broad range of topics. Asset Managers whom incorporate ESG factors into their decision making will likely consider all of the following from an environmental perspective:

  • Climate change
  • Habitat and biodiversity
  • Pollution and waste management
  • Energy consumption and renewable energy options
  • Greenhouse gas emissions
  • Transportation
  • Water consumption and management
  • Materials
  • Disaster resilience

Social factors broadly encompass the wider stakeholders impacted by the development, use and activity associated with the asset. Factors to be considered would include:

  • Health and safety
  • Community impact
  • Human rights
  • Inclusion and diversity
  • Working conditions
  • Prospective tenants / on-site activities
  • Amenities

Perhaps the least obvious factors for a tangible asset, however, a number of important considerations exist for Asset Managers to incorporate into their decision making:

  • Data protection and privacy
  • Cybersecurity
  • Legal and regulatory compliance
  • ESG clauses
  • Compliance with environmental standards
  • Anti-money laundering, bribery and corruption

A 2005 United Nations report stated that “In our opinion, it may be a breach of fiduciary duties to fail to take account of ESG considerations that are relevant and to give them appropriate weight ..........” this statement was in the context of the strong link between good ESG performance and good financial performance and was aimed at the boards of companies.

Sustainability needs to be at the heart of decision-making. Financial returns and value creation can only be sustained if companies are well governed and the social and environmental assets underlying those returns are not depleted.”

Karlien de Bruin Director, Product Development - ESG

Sustainable development can be defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Many pension funds and institutional investors are interested in sustainable investing from an alpha generating and risk-reduction approach. Sustainability considerations are considered particularly important for long-term investors.

Recently there was perhaps a myth that investors would need to choose between value (investment returns) and values (mission alignment), but this position really has been dispelled. Investors are actively seeking to invest with Managers whom can demonstrate strong leadership on ESG factors. Increasingly this appetite is being driven by individuals too, for example, as we all take more interest in where our pension contributions are invested.

To capture this capital, many Managers are looking to launch ESG focused funds or Impact funds. Whilst an impact fund typically focuses on one very particular need, the latest ESG funds are increasingly diversified across several ESG projects, for example the fund might invest into social property projects alongside renewable energy projects. Demand for these type of investments is matched by supply-side requirements, particularly in areas such as affordable housing, healthcare and regeneration projects.

As noted earlier, the rapid rise in the importance of ESG and sustainability has created an urgent need for fair metrics to measure and report. In recent years that has been a wide variety in the quality of disclosure, often with too much ‘green-washing’ present. There has been little consistency and so investors currently find it hard to compare performance.

Regulation is coming thick and fast. In the EU the Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector, gives rise to a number of new obligations and disclosure requirements which will take effect from 2021 onwards. Rule consistency is one of the driving motivations for the new regulation to avoid diverging measures at national levels.

It is also encouraging to see that five of the leading bodies promoting reporting on the topic of sustainability have recently announced a shared vision for a comprehensive reporting system and commitment to greater collaboration. In July 2020, two of the most prominent bodies, the Sustainability Accounting Standards Board (SASB) and the Global Reporting Initiative (GRI) announced a collaborative workplan. Both organisations currently provide a set of standards to aide disclosure. To date SASB have focused on industry-specific standards with a sole focus on investors, whilst the GRI standards offer a more general scope targeted at all stakeholders.

The industry as a whole will need to cooperate and play its part in the challenge laid down by Sir David Attenborough. Whilst the regulation and legislation all take some time to catch up, implementing the fundamentals of ESG and sustainability into every material decision has to be the way forward.

We require more than intelligence. We require wisdom.”

Sir David Attenborough
United Nations-supported Principles for Responsible Investment (UN PRI).

Sanne is now a UN PRI signatory

Read our full announcement for more about Sanne’s commitment to uphold the six PRI principles.

Full article here
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How can Sanne help? Should you require our expert team to advise on various ESG ratings, benchmarks, metrics and reporting services available. We would be delighted to speak with you to discuss how Sanne can assist, please contact Simon or Karlien directly.

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Simon Vardon Global Head of Real Assets - Jersey
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Karlien De Bruin Director, Product Development – ESG - South Africa
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Other insights from Simon Vardon

Insight 2 October 2020
Riding the regulatory wave
Insight 6 July 2020
Navigating new taxation requirements for non-resident investors in UK real estate
Insight 22 June 2020
2020 > The year of the swan